2/01/2009

At World Economic Forum: "New Model" Sought


The Wall Street Journal reports today that the world’s elite, gathering in Davos this week, are amazed at how little they know about the economy. There is even talk about how capitalism itself is a failing business model. One participant, who is giving a business leadership seminar there, is quoted as saying:

The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one.

Instead of looking for new government quick-fixes, business and government leaders need to discover (I wish I could say, rediscover) what is real capitalism–free-market capitalism–in theory and practice.

Today’s problems can be traced to the government side of the mixed economy, as well as a perverted capitalist ethic in the boardroom. (The two are related to each other.) Business prudence has been weakened by politically set and artificially low interest rates, by regulations, and by government jawboning for "common-good" lending.

Real capitalism is about government neutrality and noninterference in the economy. From the business side, it is about principled entrepreneurship, defined as "maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity" (see p. 79 here). Such value creation can only be measured in a free market where consumers have choices, and where profits and losses are meaningful measures of business performance. And such wealth creation eschews political profiteering, which redistributes and destroys value rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.

The World Economic Forum has always been a haven for the political capitalists. In 2001, Ken Lay gave five talks at Davos on his views of Enron and corporate social responsibility (see the Epilogue in Capitalism at Work about Enron’s anti-capitalistic business model).

Indeed, a new business model is needed, and one quite different from what the participants are likely to hear.


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